‘You’ll be out of a job soon, at this rate,’ a friend of mine told me last week, with a cheerful grin.
Hardly a matter to joke about, I thought. But times like these bring out the gallows humour in all of us.
Other Small cap news...
LED lighting trend grows
Anyway, what he was referring to was the shrinking pile of data, and news, and commentary, and facts and figures that is the raw material of my work. LED lighting trend grows
- Dialight (ticker: DIA) receives a major $12m order from the USA for its unique White LED Strobe Lighting. Valued at an estimated $12m over the next 24 months, initial shipments will start in the second half of 2009.
- LED lighting products reduce power consumption of lighting by up to 60%. They last longer than conventional bulbs and cut global warming.
- ‘LED lighting’, says Dialight ‘is at the beginning of a steep growth curve.’
- IMPORTANT: For the best way of investing at the start of this curve, see the June issue of Red Hot Penny Shares. Click here for how to receive this.
The penny share market, you see, is shrinking. And were it to disappear altogether then I suppose I would have to go off and climb Mount Kilimanjaro. Or write that sophisticated but oh-so-gritty novel that is said to lie within each of us.
I am certain it won’t come to that. But still, the inescapable truth is that the penny share market is getting smaller. This is not so good for me - but it is great news for you. I’ll tell you what I mean.
Penny shares are racing ahead
The penny share market is fast sorting itself out and the results are impressive. Since its low point on 9 March, AIM, the market for small companies, has risen by 43%. That certainly beats anything that the big boys have managed to achieve. The FTSE 100 share index is up just 22% in that time; the wider All-Share index has gained 23%. Clearly a more powerful force is driving the market for small companies than that for their larger brethren.
This is good news for small cap investors. But what’s going on?
Some of the factors that have been driving the rally apply to all companies. Banks are no longer expected to fall upon each other like a pack of cards; some green shoots have appeared; some confidence has returned to financial markets.
Sellers have been in retreat and buyers have rediscovered their animal spirits. Crucially this has enabled companies to raise the fresh capital that they need to see them through the recession. Rights issues have been coming thick and fast, bids and deals are back on the agenda. BPP (ticker: BPP), Brixton (ticker: BXTN), and Carluccio’s (ticker: CARL) are just three of several companies to be on the receiving end of take-over approaches. Corporate financiers, who organize these deals and get paid for doing so, are smiling at last.
But there is no particular reason why these factors should affect small companies any more or less than large companies. The outperformance of the penny shares has its roots elsewhere. I can identify four causes.
Four reasons penny shares are beating large caps
The first is that the small company market fell much further in the downswing. Valuations became, to use a word much loved by City analysts, ‘compelling.’ Luminaries such as Jim Slater and Nick Leslau drew attention to the extraordinary undervaluation of small companies and value always wins through in the end.
The second explanation lies in forced selling. Last year managers of small company funds were forced to dump shares upon an unwilling market in order to pay out their own customers. Small company shares are relatively illiquid, and the sale of even a small parcel of shares was able to knock a share price.
Next, small companies are considered to be more risky. I dispute this. While some companies certainly make for more risky investments than others, the reasons are to do with the nature of the business and its financial structure, and not with size. But to the extent that others believe this fallacy, it becomes self-fulfilling. That means that as the perceived risk of making any kind of stock market investment has receded, so small companies have attracted the bold investor.
But it is the fourth and final reason that really marks out the small company sector.
If small companies are not enjoying their experience on the stock market they can just up sticks and leave. The first rule of economics is that price is determined by the balance of supply and demand. So when small companies were in vogue, a mass of them arrived on the stock market and soaked up investors’ cash. In consequence the index went nowhere.
But now, small company executives are concluding that they would rather not pay fees to the London Stock Exchange and City advisers. So they are retreating to the private sector. The trend is becoming quite a flood. The number of AIM-listed companies that hit 1,694 at the end of 2007 is now down to 1,439, and is falling fast. With fewer shares to chase that should - other things being equal - mean rising prices.
And it is happening. So as my job prospects get dimmer, penny share investors can afford to smile. And right now, my top three penny share recommendations are in the hottest sector of the moment: oil. Click here to discover them now.
Good investing,
Tom Bulford
For The Penny Sleuth
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P.P.S. If you want to follow the insights of a small company investor, and uncover the hidden gems of the stock market, find out more about The Penny Sleuth by clicking here.
